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How much will you need to retire comfortably?
When planning for retirement, remember the cost of living will rise over the decades.
It’s difficult to plan properly for the future when it all seems so impossibly far away. How can you expect to know what you’ll be doing, how much you’ll be earning or what the cost of living will be when you retire? If you’re 25 today and aim to retire comfortably at 65 in 40 years’ time – how can you guess the cost of living in 2062? And if you don’t know what things will cost, how can you possibly plan how much you’ll need to live out your retirement in comfort?
That’s when projections based on an analysis of prior financial patterns and current trends in inflation can be useful. Based on past behaviour and current evidence, financial experts can make some educated guesses about the future cost of living. Your eventual needs will depend on your personal circumstances, including how old you are now, whether you’re married and have a family, when you plan to retire and whether you have already started investing in retirement savings.
But we can explore the basic principles with an imaginary test case.
Making some assumptions about working life vs retired life
We can’t foretell the future. Financial projections are always assumptions, not predictions or promises. But when they’re based on sound assumptions with solid data, projections are handy planning tools.
Statistically, you’ll probably work from your 20s into your 60s, maybe even into your 70s. And with life expectancy increasing, you could live on into your 90s, or past 100. That gives you 40 to 50 years of working life to save enough money to see you through another 30 or 40 years or more. You could be dependent on your retirement savings for almost as long as you spent saving them.
In our test case, let’s assume you’re now 25, earning R20,000 a month, with expenses of R15,000. At this stage of your life, you should be saving between 10% and 15% of your salary, and some say 17%. In our example, we’re using 17.5% to get a round amount of R3,500 a month.
There really is very little time to waste, if you want to maintain the same lifestyle in retirement
We’ve assumed your salary will grow at an average of 5% a year, and so will increases in your pension contributions. To simplify the test case further, we’re assuming that inflation over the next 40 years averages out at 4% a year, and that you earn an average return on your investment of 10% a year.
The impact of inflation on the cost of living
By the time you’re 35, your salary will have grown to around R32,500 and your monthly expenses will be about R22,000, while you should be saving just more than R5,000 a month. If you’ve been saving diligently, your retirement savings would have grown to about R850,000 in those 10 years.
Fast-forward another 10 years, and your savings (if untouched) will be close to R4 million, while your monthly expenses will be about R33,000 and your salary about R53,000.
By 2052, you’ll be 55 years old and have a handy stash worth R12.5 million saved for your retirement, and you’ll be earning about R86,000 a month. Your monthly expenses will now be almost as much as your salary was 10 years ago.
By the time you hit 65, you’re into your final stretch before retirement – but medical advances by then might allow you to be productive for another 10 years or more. In either case, you’ll have R34 million saved up for your retirement, which should be enough to see you through.
This may seem like a really large amount, but don’t be fooled. When monthly expenses are an eye-watering R235,000 by the time you turn 95, you’ll be spending almost R1 million every 4 months – or nearly R3 million a year.
Put another way, your total expenses in the 30 years between retirement at 65 and you reaching the age of 95 will be almost R50 million. Your expenses in your 40 working years before retirement would have been only R17 million.
So there really is very little time to waste, if you want to maintain the same lifestyle in retirement that you are enjoying while still working.
If you’re unsure of how to proceed, we’ve created a handy retirement saving service that offers you a personalised retirement plan. With the help of a digital advisor, we will help craft a plan that is suited to your specific goals and ambitions.
Reaching retirement should then be a celebration, not a nagging concern about your future well-being.
